Australia’s economy may be teetering on the brink of a domestic recession as the resources boom falters, consumers restrain spending and businesses cut investment plans.

Domestic demand shrank 0.3 per cent in the first quarter, the weakest ­figure since the height of the global financial crisis, Australian Bureau of Statistics figures showed on Wednesday. The economy expanded at less-than-expected 2.5 per cent over the year, the weakest growth rate in almost two years, and 0.6 per cent in the ­quarter.

The national accounts suggest the economy would have contracted without a 1 percentage point boost from falling imports and rising exports, which were driven by greater shipments and prices for iron ore and coal.

In a fresh sign of the volatility in the engine-room of Australia’s resources boom, Western Australia’s state final demand shrank 3.9 per cent, the biggest drop in more than two decades.

JPMorgan chief economist Stephen Walters said there was little strength in the economy outside exports. Mining, banking and retailing added to growth. Manufacturing and construction ­contracted.

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“Technically, it’s not a recession because GDP went up, but the domestic parts of the economy all went backwards at the worst rate of decline since the GFC," he said.

Treasurer
Wayne Swan
described the figures as a sign of Australia’s resilience and said a sustained fall in the ­dollar “would be a good thing" as the resources investment boom ended.

He admitted nominal growth – a critical driver of government tax revenues – is falling short of last month’s budget forecasts.

Gap in economic growth

The dollar dropped after the data by half a cent to US 95.81¢. Investors raised the chances of a cut in interest rates by the Reserve Bank of Australia in August to 63 per cent from 49 per cent.

The national accounts support Reserve Bank governor
Glenn Stevens
’ warning in an interview with The ­Australian Financial Review in December that the economy faces a gap in ­economic growth if non-mining sectors such as housing construction don’t offset slowing resources investment.

The S&P/ASX 200 Index fell 1.3 per cent to 4835. Business investment fell 4.3 per cent in the quarter. Minerals and petroleum exploration plunged 11.2 per cent. Consumer spending rose 0.6 per cent in the quarter, for an annual gain of 2 per cent, the weakest rate – apart from the 2009 crisis – since 1993.

Spending was helped in the quarter by federal government back-to-school cash payments.

“The economy is now at that watershed moment as the mining investment boom has either passed its peak or about to . . . [ahead] of signs of a decisive pick up in other elements of domestic spending," said National Australia Bank economist David de Garis.

Goldman Sachs Australia chief economist Tim Toohey brought forward the investment bank’s forecast for a rate cut to July from November and said Australia was already in an “expenditure" recession.

Shadow treasurer
Joe Hockey
seized on the figures as a sign that “domestic activity continues to be in a slump".

Swan warns against ‘doomsayers’

“That is before you saw a significant deterioration in consumer sentiment . . . after the budget was delivered," he said.

“That matches the view of business that we speak to and it certainly matches the consumer sentiment that is around."

Mr Swan warned against “doom­sayers" and said the economy grew faster than almost every advanced nation over the year through March 31.

“Today’s result really does shine a light on the resilience of the Australian economy in the face of challenging ­global economic circumstances," he said.

He declared “we have broken the back of weak productivity growth" and said new business investment was around 50-year highs as a proportion of the economy.

“When you look at today’s national accounts they are a reminder of what Australia has achieved – and we can face the future with confidence," he said.

While the latest figures are consistent with forecasts in last month’s federal budget for a 2.75 per cent rise in real GDP growth this financial year, Mr Swan acknowledged nominal GDP growth was below Treasury’s 3.25 per cent prediction.

Asked what that meant for revenues, he said it was premature to make a judgement given the dollar has fallen in recent weeks.

More than triple nominal growth ‘needed’

Taxes are raised in nominal GDP, making the growth rate crucial to budget forecasts. A lower currency should offset falling commodity prices, potentially easing the hit to nominal growth.

Deutsche Bank economist Adam Boyton said nominal growth would need to more than triple to 4.2 per cent this quarter to meet Treasury’s four-week-old forecast.

“These national accounts therefore suggest down-side risk to the revenue forecasts in the federal budget," he said.

UBS Australia chief economist Scott Haslem said he was feeling “nervous about the economy" and warned growth could “grind" through 2013.

“This is a fairly key part of the economic cycle for Australia," he said. “We’re seeing the dawn of the capex slowdown, and, whilst there are im­pro­ving trends in housing and ­consumer sectors, it’s not strong enough to offset that slowdown in investment."

Most economists said the latest figures would prompt the Reserve Bank to cut official interest rates below 2.75 per cent to help construction and business investment.

Without the boost from net exports, the domestic economy “went backwards", he said.Mr Boyton said that had net exports not added to growth in both the December and March quarters “the Australian economy would be in ‘technical’ ­recession".